The discovery of significant oil and gas reserves off the coast of Guyana could be transformational for the country, and brings opportunity for local companies. Here ACCA looks at what this means for finance teams in the sector.
Oil prices collapsed from over $100 per barrel (pb) n 2013 to around $30 pb by early 2016. Shale oil in the US, produced at relatively low marginal cost and with supply switched on and off relatively easily, seemed to suggest a new “permanent” low oil price. But this has not proved to be the case and over the last year or so oil prices have risen by almost 50% to around the $80 pb mark. The combined effect of rising demand as the global economy gathered strength and supply restricted by OPEC – including sanctions to be re-imposed on Iranian oil – pushed prices higher. So the era of volatile oil prices is not over – yet.
In the longer term demand for oil is set to be on a declining trend as the transportation industry moves towards autonomous and electric vehicles. Peak oil demand may be reached within the next 20 years or so, depending on the speed of the transport revolution. If demand is in long-term decline then there is likely to be downward pressure on prices too.
In any case it seems that finance mangers will have to deal with volatile prices for the foreseeable future. The same is broadly true for gas prices which have tended to be correlated with oil prices. In the long term gas demand will be influenced by the renewable share in global energy supply – again unlikely to be supportive of prices.
When the oil price is high, oil and gas company CFOs may have the luxury of considering long-term profitability and financing ambitious projects. But in a world of continued volatile oil prices, the external influences on supply means that finance teams have to think differently.
Gas is attractive to buyers, and this looks set to continue. The US could fundamentally reshape the gas sector: the rise of the US as a gas producer will have a serious impact on global gas markets – forcing prices down not only at home but also in Asia and even Europe.
But oil is not necessarily less attractive than gas. Price volatility makes new drilling a risky undertaking. For sellers, gas is a long-term option. More complex than oil, wells cannot be as easily turned on or off according to the current price. Infrastructure has to be built to store and transport gas, whereas oil can go straight into barrels. Oil prices vary less by region compared to gas. Oil is arguably therefore a more attractive short-term investment than gas.
Companies are still looking at replacing reserves, but mostly they seek quality assets that will become commercially viable relatively quickly. Guyana seems well placed in this respect. The Guyanese government must ensure that their people benefit from oil exploitation for the long term. That requires expert planning, oversight and monitoring, and the Guyanese accounting profession is well placed to support the government and provide that expertise.
For companies in the sector uncertain times mean that focus is on cash flow. As management’s attitude to risk changes, it changes what finance teams have to focus on. There is greater financial scrutiny of upstream projects and supply contracts, and spot markets are expected to grow as supply increases. And with plenty of room left for consolidation in the sector, merger and acquisition activity is set to increase.
With finance teams having to consider these factors, their jobs are becoming more complex and more pressured. They need strong relationships across their organization to understand risks, opportunities, key dependencies, and external pressures. More than ever the finance team must be a business partner at the heart of the company’s strategy development, implementation and decision making. Companies, meanwhile, will have to be flexible to cope with the pressures that in the main are outside their control.
